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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: ForYourEyesOnly who wrote (20226)10/19/2004 1:06:43 PM
From: Gemlaoshi  Read Replies (1) of 110194
 
THC,
The "amount" of currency is often discussed, but one rarely hears talk of the "velocity" with which it travels through the economy.

Excellent observation! With the money supply on steroids and a rising CRB index, Monetarists would argue that we should be experiencing significant price inflation. However, as this chart shows, M3 velocity has actually been falling since 1994 -95.

bullandbearwise.com

Without going into the issue of the accuracy of the PPI and CPI measures, the data supports the argument that much of the Fed "pumping" of the money supply has actually been to offset the declining velocity and prevent a deflationary spiral.

The critical point is that once that huge MS is out there floating around in the ether, it can no longer be controlled by the FED and holds the potential for real disaster. If inflation expectations increase and velocity therefore increases, inflation could increase significantly without any further increase in MS.

By then we would in the "stagflation" hell of inreasing interest rates and increasing inflation as the Fed trys to sop up excess MS faster than velocity is rising.

Dave

P.S. I seem to have random bold and underlined words in this post. There was no intent for emphasis!
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